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Paper Products: Riding the FMCG story!

May 16, 2006

Introduction to results

India’s leading manufacturer of primary consumer packaging and labelling materials, Paper Products Limited (PPL), recently announced enthusing results for the first quarter ended March 2006 (January to December fiscal). While revenues grew at a good pace, margin expansion of 40 basis points along with higher other income and lower depreciation led to bottomline growth outpacing growth at the topline level.

(Rs m)

1QCY05

1QCY06

Change

Net Sales

1,011

1,161

14.8%

Expenditure

897

1,026

14.4%

Operating Profit (EBDIT)

114

134

18.2%

Operating Profit Margin (%)

11.2%

11.6%

Other Income

33

36

8.5%

Interest

1

1

27.3%

Depreciation

63

58

-7.0%

Profit before Tax

83

111

33.3%

Tax

20

32

60.8%

Profit after Tax

63

79

24.6%

Net profit margin (%)

6.2%

6.8%

Effective tax rate (%)

24.0%

29.0%

No. of Shares (m)

12.5

12.5

Diluted earnings per share* (x)

23.3

P/E ratio (x)

17.8

(*trailing 12 months)

What is the company’s business?

Paper Products Limited (PPL) is India’s leading manufacturer of primary consumer packaging and labelling materials. The company has a history of over seven decades in the packaging field and its product folio includes flexible packaging, labelling technologies and specialised cartons. It has three fully integrated manufacturing units at Thane, Silvassa and Hyderabad. The company’s client list includes HLL, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico and P&G. Exports constitute around 14% of total revenues and the company’s international division services large multinationals like Nestle, Unilever, Cadbury and Colgate Palmolive across four continents. In 1999, the company became a subsidiary of Huhtamaki, a global leader in consumer packaging, which holds a 59% stake. Huhtamaki is headquartered in Finland and is one of the top 10 consumer packaging companies in the world.

What has driven performance in 1QCY06?

Increased offtake in FMCG sector aids revenues: Being the largest organised player with a market share of 45% of the consumer-packaging segment, PPL has benefited from higher offtake of FMCG products, which is visible in the topline growth of around 15% YoY during the quarter. It must be noted that PPL is not easily dispensable by FMCG players, as packaging plays an important role in not only creating a consumer appeal but is also important for retaining the quality of the product. Further, the company seems to have capitalised on NASP (New Application, Structure and Products), the innovation strategy, whereby new products contribute to around 25% of total revenues. New product development is critical to sustain growth and the company has seemingly cashed in on this.

Cost break-up

as a % of net sales

1QCY05

1QCY06

Material cost

71.0%

68.5%

Staff cost

7.2%

7.4%

Other expenditure

10.5%

12.5%

Total expenditure

88.8%

88.4%

Margins expand: Reduction in raw material costs to the tune of 250 basis points, the single most important cost head for PPL, was the main kicker for margin expansion. However, higher staff costs and other expenditure pared a large part of the benefits derived from lower input costs.

Bottomline outpaces revenue growth: Margin expansion along with higher other income and lower depreciation resulted in the bottomline growing at a relatively faster pace during 1QCY06. But for the rise in effective tax rate (from 24% in 1QCY05 to 29% in 1QCY06), the bottomline growth would have been higher.

What to expect?

At the current price of Rs 415, the stock is trading at 13.4 times our estimated CY07 earnings and market cap to sales of 0.9 times. We are enthused by the company’s performance on the profitability front and we believe that revenue growth will remain strong going forward as FMCG volumes pick up further.

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